Wednesday, 30 November 2016

After Brexit and Trump, It’s Italy’s Turn to Keep Traders Awake

There’s an acrimonious campaign, a vote and then a cliff-hanger result. The routine is all too familiar for bond and currency traders.

After the shock of Britain’s Brexit referendum and Donald Trump’s U.S. presidential election victory, trading desks are readying for another sleepless night on Dec. 4 as they await the outcome of a ballot that again has the potential to disturb the political order. This time it’s in Italy, where a vote on curtailing the power of the Senate has turned into a judgment on Prime Minister Matteo Renzi’s leadership and the latest potential banana skin for investors.

Previous nights in the office taught Neil Staines, head of trading at money manager ECU Group Plc in London, what to watch. “It’s less about reading the polls and more about reading the markets, liquidity and pain thresholds in particular,” he said.

This time, it will be more about impact than shock. All major polls before a two-week blackout showed Renzi losing by a narrow margin and the question would be what happens next.

Volatility in the euro against the dollar approached levels seen just after Trump’s win as markets adjusted to the possibility that a defeat for Renzi might trigger early elections and gains for Five Star Movement, a populist group that wants a referendum on Italy’s membership of the euro.

Renzi, 41, has staked his political future by suggesting he would resign if he were to lose, and the first projections of the result are due just before midnight Rome time.

“You have to ask how much the market will react to something they are expecting,” said Andy Soper, head of Group of 10 foreign-exchange options at Nomura in London. “The difference this time is that it might be less about the result and more about how the vote is won or lost. There are a lot of unknowns.”

The euro, which will trade throughout the night, dropped 3 percent against the dollar this month while Italian government bonds lost 2.5 percent. That market will open the next morning, as will the stock exchange. A key concern for traders is liquidity in the early hours, whether enough banks are buying and selling as currency markets open in Asia after the weekend break.

Brokers including London Capital Group and Saxo Bank’s equities department will ask clients for larger deposits before placing a trade, adding an extra buffer against potential gaps in the market. There will also be more staff. While London Capital will deploy extra people on the night, Citigroup Inc.’s bond trading desk is planning an early shift, said Zoeb Sachee, head of European government bond trading at the bank.

“We are planning for the worst,” said Laurence Crosby, head of trading at London Capital Group. Liquidity has the potential to be “particularly bad” when the first projections are published, but having extra people awake and at their desks will make trading conditions “better than a normal day,” he said.

That said, the consequences of the Italian referendum won’t be as widespread as Trump’s win or the U.K.’s decision to leave the European Union, said Richard Benson, managing director and co-head of portfolio investment at Millennium Global Investments in London.

“It’s front and center in people’s minds,” he said. “But if you think about Brexit and the U.S. election being Premier League, this is Division Four stuff.”

Regardless of how box office the Italian referendum may or may not be, for London-based money manager Gordon Shannon it’s become more important than ever to monitor — vote by vote — politics across Europe.

“A couple of years ago I’d just have expected to read about the result early Monday morning,” said Shannon at TwentyFour Asset Management. Not anymore, he said. “I’ll be staying up all night to watch the results come in and if that means a couple of 2 a.m. margheritas, that’s a price I’ll just have to pay.”